Solar Modules
The usual slowdown in the industry during Q1 is not well documented in CEDR reporting simply due to the renewal of quota volumes as part of the undertaking program in the EU, and the opportunity to sell modules to overseas customers while holding back domestic shipments to China. A period of Chinese New Year celebrations is also a prospect to execute maintenance, and offer time off to staff. In general terms, this means Q1 is relatively busy for exports, and exports will generally slow in the third quarter potentially with the volume below first quarter volumes due to holidays in overseas’ markets falling during summer months.
Because of this, we would have expectations of greater export volumes than in the fourth quarter, but we were also dealing with a record-breaking period at the end of the last year; thus, it seemed reasonable to see lower volumes in the following month. January volume exceeded our expectations, which now suggests that the slowdown in February may be somewhat more severe. Moreover, we expect cooling of the EU demand, and for it to remain low for the rest of the year.
January 2015 was the largest volume month on record in the history of Chinese exports at 2.23GW, beating the prior month by 15%. Year over year the result is 30% higher than January 2014. At this point those figures exceed industry forecasts given for the year and are a bit higher than our 20% standard growth math for exports achieved in 2014. Industry forecasts take volume in China under consideration and as we described, until now, China was always considered a low volume region during the first quarter, which would support only 20 to 25% growth overall for the period. That view was also revised by the industry, as companies reported delays in connecting plants, and construction in many cases was in full swing during the fourth quarter, suggesting the busy period spilling over into the current period. We are concerned that delays are more related to connections and are not actual shipment delays. Therefore, we see limited volume from China in Q1 in line with the traditional seasonality.
Despite the suppressed (in our view) Chinese output, things get really exceptional when considering overall CN7 performance. Despite both Hanwha QCELLS and ReneSola running a deficit compared to last year’s volume, the peer group hit a 51% increase this month. Some of the growth percentiles have incredible levels, like Canadian at 172%; followed with the milder, but still amazing 90% for JinkoSolar and 77% from JA Solar. The top shipper of 2014, Trina Solar, seem non-delivering with “only” 60% growth in year over year.
In comparison to last year, the most notable increase is in the EU moving to 30% of the volume in comparison to 21% in 2014. Looking back to Q4, the increase is made at the cost of US volumes and, in particular, recording the absence of Canadian Solar from the US market. The company took the fourth spot on the list, only having 7MW shipped in January, while averaging 36MW per month in Q4. Perhaps this is a signal that the Ontario plant is engaged in the US, while the company is awaiting new tariff levels for its Chinese cells coming sometime in the second quarter. Despite the US deficit, actual MW in Q1 appear only 100MW off from Q4, thanks to almost exclusive deliveries made by Canadian to Honduras.
If the EU was going to keep its January pace, we would be looking at an 80% sequential increase in deliveries. We do not feel that condition will materialize. We speculate that the EU will drop off in March and perhaps as soon as February due to UK volumes dissipating as plant completions for sites greater than 10MW must be done prior to March 31st. On that objective, as we predicted, the UK is the second-largest destination in January at 354MW delivered. Other known hubs for stops before the last leg of the journey to the UK, Holland and Belgium, managed to receive so many modules that Belgium made it to the top 10 destinations list for the month. Canadian Solar is probably the most obvious representation of the overstated EU market, doubling its overall percentage of participation in the EU market in January versus Q4. Its high volume in January recorded as much modules to Europe as the company did in the whole of Q4. Among CN7, no other company has such a dramatic shift.
There is no surprise to see Japan as a leader among the top 10 destinations. The country shows a 12% increase over January 2014, and 14% sequential growth over December 2014. This pace, if sustained, would lead to another quarterly record, now over 2.1GW, the first ever single destination receiving 2GW of modules in three months. This high forecast comes with the warning that volume could dip severely in February to reignite again in March, as happened in 2014. Still, Q1 2014 was the second-best quarter for Japan, after Q4. If we can get similar values, we can be almost certain that Japan will at least repeat installations of 2014 or beat them in 2015. There is a completely oblivious assumption out in the public about new FiT negatively affecting the demand in Japan. This situation supposedly will start unveiling in late March or certainly April. In our view, this is one of the most confusing statements about Japan, and to our surprise it’s still coming from a number of investment bank analysts. We remain positive about Japan not only for 2015, but also for 2016 and 2017, with the volume of deliveries tapering off, but remaining among the top three destinations.
Among the top 10 country destinations, we continue to see the heavy presence of Honduras. Australia and India also seem to be progressing at a pace to beat Q4 numbers. Philippines vanished from the list, and so has Algeria. Instead, we have Taiwan showing at 45MW. It is a relief that 44MW delivered to this destination came from Risen and not from CN7 companies. CN7 did not have meaningful volumes to Malaysia in January. In Q1, 37 out of 50MW sent to Taiwan were shipped by Mainland companies, including Risen. No CN7 had meaningful value over 1MW. Approximately 11MW were shipped to Malaysia by CN7 during the fourth quarter, out of 36MW delivered in total. Considering lead times of sea shipping lines, this information may play a role in the recently announced investigation, which allegedly led to cease order of inventory of some 22 Chinese companies at Rotterdam port in Holland. The Chinese are accused of relabelling Chinese-made modules sent to Taiwan and Malaysia as if they have originated in those countries, for the purpose of resending them later to the EU.
In January we changed the review of US-listed market share to CN7. For the full year 2014, CN7 held 56% of the market. In January, CN7 are at 55%, and this compares with 51% in January 2014. Looking at the monthly figures, Canadian delivered volume over its production capacity in China, listed as 2.5GW at the end of 2014, which represents 200MW per month. Delivery in January shows 57% more volume over 100% utilization, confirming OEM arrangements or potentially heavy inventory draw. Canadian holds 14% of total exports, an increase of 2% from Q4. Trina remains at 11% and Yingli took, perhaps temporarily, third place from JA Solar with 10% of the exports. JA is fourth with 8% of the exports.
CN7 GADP (Global Average Declaration Price)
January GADP has stayed flat for Trina Solar at $0.58 went up for CSIQ at $0.57, dropped for JASO at $0.63, and went drastically down by 8% for JKS to $0.57. JKS has a very low entry GADP to Australia at 13MW for $0.45 per watt, but probably the biggest impact was the drop from $0.67 to $0.60 for the 27MW delivery to Holland.
Investors should consider the relationship between growth of shipments to GADP and afterward, to ASP. Gross margins are critical, particularly with the manufacturing enterprises solely relying on revenue from third-party sales. While this statement is true, the scale or growth in volume of shipments has a beneficial effect on earnings despite lower gross margins. While Q1 2014 GADP had dropped, on average, by 12%, and the companies managed to lower its COGS by an average of 8%, the shipment increase of 26% is a substantial remedy to sustain net income abilities. At the same time, the growth may not be possible if deterioration continues further. With the exception of Trina and Canadian, no other CN7 is planning to actively seek sales of solar plants, an engine of net income growth. The ASPs are not only vulnerable to market demand shifts; they are also victims of the currency exchange, which happens to affect Japan and the EU thus far in this quarter and most certainly will create impact on Q1 results. Another important factor for the Chinese companies is the cost of labor measured in RMB. In addition, Canadian Solar will be influenced by a currency movement in Canadian dollar, both for sales of its plants and labor in the Ontario facility. At the same time, using internal benchmarking, we can observe price movement for various markets. Using Japan, UK and Holland as designated locations, we can see the following trend from December for CN4:
| Dec | Jan | % Ch | ||
| JAPAN | CSIQ | $ 0.54 | $ 0.54 | 0.00% |
| TSL | $ 0.61 | $ 0.61 | 0.00% | |
| JASO | $ 0.61 | $ 0.62 | 1.64% | |
| JKS | $ 0.54 | $ 0.53 | -1.85% | |
| UK | CSIQ | $ 0.68 | $ 0.70 | 2.94% |
| TSL | $ 0.66 | $ 0.64 | -3.03% | |
| JASO | $ 0.65 | $ 0.63 | -3.08% | |
| JKS | $ 0.67 | $ 0.66 | -1.49% | |
| DUTCH | CSIQ | $ 0.66 | $ 0.65 | -1.52% |
| TSL | $ 0.66 | $ 0.59 | -10.61% | |
| JASO | $ 0.68 | $ 0.65 | -4.41% | |
| JKS | $ 0.67 | $ 0.60 | -10.45% |
The euro dropped 9.3% during the period from December 1st to January 31st, 2015. The yen dropped 1% during the same period. And the Canadian dollar dropped 10.78% against the US dollar. RMB increased its value against the dollar by 1.6%. With exception of the Canadian dollar, all currency movements are considered unfavorable for manufacturing purposes. Selling plants in Canada during January would draw a potential loss of 10% in revenue and could impede margins if the Canadian subsidiary selling projects recognized projects’ assets at certain levels of the US dollar exchange prior to Canadian dollar deterioration.
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